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New Chinese rules on abusing IPRs. What does it mean for the exercise of IPRs after Qualcomm case?

On April 13, 2015, the State Administration for Industry and Commerce("SAIC"), one of the three Chinese Antimonopoly Enforcement Authorities which is responsible for non-price related anti-competitive activities, published Rules on Abuses of Intellectual Property Rights Eliminating or Restricting Competition ("Abusing IPR Rules"). The Abusing IPR Rules were approved by Mr. Mao Zhang, the head of SAIC on April 7 and will come into effect on August 1, 2015 which is exactly 8 years after the Antimonopoly Law ("AML") came into effect.

The SAIC has spent years drafting the Abusing IPR Rules. As the SAIC is only responsible for non-price related anti-competitive activities, the Abusing IPR Rules only apply to non-price related abuses of intellectual property rights ("IPRs") which eliminate or restrict competition. The National Development and Reform Commission ("NDRC") has not issued any specific rules or guidance on anti-competitive abuses of IPRs, although its current general rules on antimonopoly agreements and abuses of dominance are applicable to abuses of IPRs if they eliminate or restrict competition. The NDRC's recent decision against Qualcomm's abuses of dominance is an example that the NDRC's general rules are applicable to abuses of IPRs.

This Alert highlights the most important provisions of the Abusing IPR Rules.

Scope

The Abusing IPR Rules repeat Article 55 of the AML and apply only to abuses of IPRs which eliminate or restrict competition. The abuses of IPRs which do not eliminate or restrict competition are not subject to the Abusing IPR Rules. Unlike Commission Regulation (EU) No 316/2014of 21 March 2014 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of technology transfer agreements ("EU Regulation 316/2014") which applies only to anti-competitive agreements, the Abusing IPR Rules apply to abuses of dominance under Article 17 of the AML. The scope of the Abusing IPR Rules is therefore broader, since it applies to both unilateral conduct and agreements.

The relevant market and the relationship between companies

Under Article 3 of the Abusing IPR Rules, the relevant product market can be either the technology market or the market of the product which incorporates the technology concerned. This definition is consistent with the relevant EU guidance.

The relationship between the undertakings concerned is key in deciding which provisions are applicable under the Abusing IPR Rules. Such relationships in the IPR sector are not always straight forward when compared to more traditional sectors. On the one hand, for example, licensors and licensees can be competitors at the product market level and at the same time be in a vertical relationship in the technology market. Article 15 of the Abusing IPR Rules clarifies this by providing that the agreement concerned will not be considered as an agreement between competitors, if the companies concerned were not competitors when they signed their agreement, but only became competitors after the signing.

Safe harbour for anticompetitive agreements

Article 5 of the Abusing IPR Rules provides a safe harbour for anticompetitive agreements. Under this article, exercise of IPRs will not fall within Article 13.1.6 and Article 14.3 of the AML if the relevant companies fulfil one of the following conditions (unless their action has been proven to eliminate or restriction competition by other evidence):

The combined market share of the parties in the relevant market is no more than 20%, or no less than four other independent, interchangeable technologies exist in the relevant market and can be licensed at reasonable costs; or

Neither of the parties has a market share of more than 30%, or no less than two other independent, interchangeable technologies exist in the relevant market and can be licensed at reasonable costs.

The market share thresholds of 20% and 30% are in line with Article 3 of EU Regulation 316/2014.

However, EU Regulation 316/2014 does not use the number of independent, interchangeable technologies as an alternative of the market share threshold. The wider scope of the exemptions under the Abusing IPR Rules is useful since it is often difficult to calculate market shares.

This is the first time under the AML and related rules that safe harbor provisions have been used. The safe harbour will be welcomed by IPR holders since it provides legal certainty and protection from antitrust risks in China, at least for non-price related activities. However, the interesting question is how the NDRC will treat price-related agreements that fulfil the conditions above. To what extent the NDRC will take into account these rules is questionable since the rules are not issued jointly by the SAIC and the NDRC. In practice, this will not be a material problem, at least for the near future, since most (if not all) price-related anticompetitive agreements are listed in Article 13.1.1-13.1.5 (which lists prohibited horizontal anti-competitive agreements) and Article 14.1-14.2 of the AML (which prohibits resale price fixing and the setting of minimum resale prices) and thus will not fall under the safe harbor rules under Article 5 of the Abusing IPR Rules (even if such rules were also adopted by the NDRC).

The AML does not use the term of hardcore restrictions. However, the Abusing IPR Rules differentiate Article 13.1.6 and Article 14.3 of the AML from Article 13.1.1-13.1.5 and Article 14.1-14.2 of the AML under Article 5 of the Abusing IPR Rules by providing that the exercise of IPRs will not fall within Article 13.1.6 and Article 14.3 of the AML if the companies concerned have small market shares. By contrast, companies will be subject toArticle 13.1.1-13.1.5 and Article 14.1-14.2 of the AML even their market share is small.

This differentiation is of significant importance since it is always arguable when the effects on competition need to be examined when analysing an agreement. Some experts argue that de minis rules should be developed in China in order to take into account the effects of different anti-competitive agreements. Does adopting Article 5 of the Abusing IPR Rulesmean that the Antimonopoly Enforcement Authorities, or at least the SAIC, will follow the differentiation approach (similar to the EU de minis approach) for all anti-competitive agreement in the future? Although it is too early to draw any conclusions, this will be an interesting point to follow.

Essential facilities

Under Article 7 of the Abusing IPR Rules, a dominant undertaking is prohibited from refusing to license its IPR if its IPR is considered as an essential facility. Article 7 also lays down the following (cumulative) conditions under which an IPR could be considered as an essential facility:

The IPR concerned is not reasonably interchangeable with other IPR and is essential for other competitors to participate in competition in the relevant market;

Refusing to license the IPR concerned will have a negative impact on competition or innovation in the relevant market or will damage consumers’ interests or the public interest; and

Licensing the IPR concerned will not cause unreasonable damage to the licensors.

During the process of formulating the Abusing IPR Rules, the essential facility clause raised significant concerns by IPR holders, in particular several international companies in the telecommunications sector. The provisions that were ultimately adopted show that the SAIC has tried very hard to resolve these concerns by defining the conditions under which an IPR could be considered as an essential facility. In particular, one of the conditions is that the interests of the licensor shall not be unreasonably damaged. Nevertheless, it remains to be seen to what extent such conditions will remove the concerns of licensors due to the vague terms used in this provision, such as "unreasonably damaged".

Imposing unreasonable conditions by a dominant company

Article 10 of the Abusing IPR Rules provides that no dominant undertaking may, without justifiable reasons, impose the following unreasonable restrictive conditions when exercising their IPRs:

Requiring the other party to exclusively license back technology improved by them;

Prohibiting the other party from challenging the validity of the IPRs;

Restricting the other partys production, use and sale of competing products or research, development and use of competing technology upon the expiry of the relevant license, where this does not involve any infringement of IPRs;

Requiring the other party to continue to pay royalties after the expiry of the protection period or for IPRs which have been held invalid;

Prohibiting the other party from dealing with any third party; or

Imposing other unreasonable restrictive conditions on the other party.

Currently, there are several investigations and decisions against companies that are being viewed as dominant for imposing unreasonable conditions when exercising their IPRs. The recent Qualcomm case is an example in point. Thus, Article 10 provides useful guidance on what activities could be considered as an abuse of dominance by imposing unreasonable conditions and thus in violation of the AML.

Patent pool

Under Article 12 of the Abusing IPR Rules, the term "patent pool" refers to the arrangements or agreements under which two or more patentees jointly license their individually held patents to other third parties in certain ways. They may form a specific joint venture for this purpose or entrust a certain member of the patent pool or certain independent third party to manage the patent pool.

Article 12 of the Abusing IPR Rules provides that no member of a patent pool may use the patent pool to exchange sensitive information in relation to competition such as price, production volume and market segmentation to enter into anticompetitive agreements which are prohibited under Article 13 and 14 of the AML; agreements where the undertakings can prove compliance with Article 15 of the AML are exempted from such prohibitions.

This is first time that the exchange of sensitive information is clearly prohibited under theChinese antitrust rules. The new provision applies only to information exchange in the IPR sector. Nevertheless, such a provision will strengthen the view held by many practitioners that, like in the EU and the US, the exchange of competitively sensitive information is prohibited under the AML, although the AML itself does not mention this clearly.

Unlike the EU Commission Guidelines on the application of Article 101 of the Treaty on the Functioning of the European Union to technology transfer agreements 2014/C 89/03, Article 12 of the Abusing IPR Rules only repeats that patent pools are subject to Article 13 and Article 14 of the AML. There are no examples or explanation on what behaviour in patent pools could violate Article 13 and Article 14 of the AML.

It is interesting that Article 12 also prohibits abuses of dominance in regard to patent pools by providing that no dominant undertaking or patent pool management agency may, without justifiable reasons, use patent pools to engage in the following behaviour which would constitute an abuse of dominance:

Restricting members of a patent pool to license a patent as independent licensor outside the patent pool;

Restricting members of a patent pool or licensees to independently or jointly with any third party engage in research and development of other technology which competes with the patents of such patent pool;

Forcing licensees to exclusively license back the technology which the licensees have improved or researched and developed to patent pool management agencies or members of such patent pools;

Prohibiting licensees from challenging the validity of the patents of such patent pools;

Applying discriminatory transaction terms to equivalent members of patent pools or licensees of the same relevant market; or

Others abuse of dominance deemed by the SAIC.

This provision clarifies what types of conduct constitute anti-competitive activities by undertakings through patent pools. Such prohibitions are in line with Article 17 of the AML.

Standard-Essential Patents (SEPs)

Under Article 13 of the Abusing IPR Rules, the term "SEPs" refers to patents that are essential to implement a certain standard. Article 13 provides that a dominant company shall not, without justifiable reasons, conduct the following actions when formulating and implementing standards:

Deliberately not disclosing the information in relation to its IPRs to standard setting organisations, being aware that its patents may be incorporated into relevant standards, or expressly waiving their IPRs, but claiming for such IPRs against the enforcer of such standards when certain standards incorporate such IPRs;

After such patents have become SEPs, refusing to licence them on fair, reasonable and non-discriminatory ("FRAND") terms, tying products or imposing unreasonable conditions which eliminate or restrict competition.

Article 13 is in line with the international practice regarding SEPs. Article 13 prohibits patent ambush for SEPs and clearly spells out the FRAND principle. However, since the wording used in Article 13 is still very vague, it remains to be seen how this principle will be applied in practice.

What do the Abusing IPR Rules mean for doing business in China?

For some years now, businesses have been aware that their mergers and acquisitions may attract close scrutiny by the Chinese authorities. Many businesses, however, have not appreciated the speed with which the Chinese authorities have embraced the enforcement of other areas of antitrust law, namely the prohibitions of IPR related anti-competitive agreements and abuses of dominance. It is significant that both the NDRC and the SAIC have not limited their enforcement activities to traditional manufacturing and service sectors, but have rapidly turned their attention to the complex IP/antitrust interface, an area that the European Commission, for example, is investigating only cautiously even 50 years after the adoption of the EU competition rules.

Now, the SAIC has adopted the first IP/antitrust interface rules under the AML, although the Abusing IPR Rules are still very abstract and do not go into much detail. It will be the eighth anniversary for enforcement of the AML when the Abusing IPR Rules come into effects. Due to the complexity of IPR related competition law issues, the SAIC has come a long way to adopt these rules. The Abusing IPR Rules are an important milestone in the development of Chinese antitrust law, although further improvement and more detailed guidance are needed. Given this new development and along with the recent cases in the IPR sector, both licensors and licensees should make sure they are compliant with the Chinese competition rules and should audit their practices and update their antitrust compliance training and manuals.